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Construction Case Law update

Costain v Tarmac Holdings [2017] EWHV 319 (TCC)

Background

Pursuant to a sub-contract Costain engaged Tarmac to supply concrete for a safety barrier on the M1 motorway. The sub-contract incorporated the NEC3 Supply Short Contract Conditions (the “Supply Conditions”) and the NEC3 Framework Contract Conditions (the “Framework Conditions”).

Each set of conditions related to a different aspect of the parties’ contractual relationship. The Supply Conditions related to the supply of concrete and the Framework Conditions related to the quotations received.

Both the Framework Conditions and the Supply Conditions had differing dispute resolution clauses. The Framework Conditions contained a dispute resolution provision that permitted adjudication “at any time”, a reference to the jurisdiction of the courts of England and Wales and was silent on arbitration.

The Supply Conditions contained a restricted right to adjudicate within a specified time frame and, if one or more parties were dissatisfied with the adjudicator’s decision, a right to arbitrate (clause 93.3).

Both the conditions of the Framework Conditions and the Supply Conditions included the requirement at clause 10.1 that the parties shall act “in a spirit of mutual trust and cooperation”.

It was common ground that the concrete was defective but there was a dispute between the parties as to the scope of the appropriate remedial works and the associated costs. Tarmac argued that because Costain failed to comply with the provisions of clause 93.3 it was time barred from making a claim for the additional monies relating to the remedial works. Costain disputed this.

The dispute was referred to adjudication and the adjudicator found in favour of Tarmac. By this stage, the parties had engaged the Pre-action Protocol. Costain then issued proceedings and sought to recover circa £6m for the remedial works.

Tarmac argued that the proceedings should be stayed on the basis the sub-contract included an arbitration agreement. Costain argued that there was no arbitration agreement, or in the alternative that the arbitration agreement was inoperative.

Decision

Taking each of the parties’ arguments in turn:

Tarmac’s argument

The sub-contract contained an arbitration agreement.

HHJ Coulson reaffirmed the usual rules relating to interpretation and construction of contracts. He considered the conflicting provisions of the Framework Conditions and the Supply Conditions and found that, although there were two sets of conflicting conditions, they worked to govern different aspects of the parties’ relationship. He said that only if there is an irreconcilable discrepancy is it necessary to resort to some sort of order of precedence in order to make sense of the contract. It is not appropriate for a court to construe a contract by picking through its terms; working out what might still be applicable at the date of the contract and what might relate to obligations which had been performed. Further a court will not correct a bad bargain.

The Framework Conditions related to the offer and acceptance of the quotation and the Supply Conditions related to the supply of concrete. The issue in dispute therefore determines which set of conditions apply. Here it related to the supply of defective concrete and therefore the dispute mechanism in the Supply Conditions applied. To that end, there was an arbitration agreement and the time bar was effective.

Costain’s alternative argument

The arbitration agreement was inoperative by either virtue of estoppel or abandonment.

Section 9(4) of the Arbitration Act states that an arbitration agreement would be inoperative if it has been repudiated, abandoned and both parties accept this, or else if the party is precluded by estoppel.

HHJ Coulson found that:

even though the parties engaged the Pre-action Protocol at no point did Tarmac abandon its rights to arbitrate

there was no case for estoppel either by representation or convention.

Costain further argued that even if Tarmac had not done anything which “crossed the line” so that estoppel could be relied upon, Tarmac was in breach of clause 10.1 of the sub-contract by failing to point out to Costain that it was going to be time barred from bringing the adjudication claim.

Importantly, Costain knew what the dispute resolution clause said and it knew of the time bar. Costain’s mistake was thinking it could rely on the Construction Act and its right to adjudicate at any time, not realising that the contract did not fall within the definition of a construction contract as it related to the supply of material.

HHJ Coulson considered what duty clause 10.1 imposed on Tarmac in this context. He drew parallels with a duty of good faith, and referred to Keating which says that parties must act in a way that is: “honest, fair and reasonable, and not attempt to improperly exploit the other.”

Taking each in turn Coulson was reluctant to define the term “fairly” saying that this was too subjective and would be difficult to police.

Coulson concluded that Tarmac had not breached clause 10.1, and in relation to the obligations imposed by clause 10.1 “at its highest” the obligation meant that:

“the defendant could not do or say anything which lulled the claimant into falsely believing that the time bar in clause 93 was either non-operative or would not be relied on in this case. For this purpose, I am also prepared to accept that this obligation would go further than the negative obligation not to do or say anything that might mislead; it would extend to a positive obligation on the part of the defendant to correct a false assumption obviously being made by the claimant, either that clause 93 was not going to be operated or that the time bar provision was not going to be relied upon. But beyond that, on my view of clause 10.1, there can have been no further obligation, because otherwise the provisions would have required the defendant to put aside its own self-interest. ”

Comment

Even though clause 10.1 of NEC3 is quite often overlooked (mostly because there is no definitive case law on what it means in practice), this case shows that the Courts have an expectation relating to the parties’ conduct in complying with this clause and it will be scrutinised accordingly. Although parties are not required to act against their own self-interest they must not do anything to mislead.

Background

Vinci was engaged as main contractor by Gatwick Airport. Vinci appointed Beumer in relation to works on the South Terminal baggage handling system. Beumer in turn appointed Daifuku Logan Ltd (“Logan”) as the sub-sub-contractor.

A dispute arose between Beumer and Vinci and at the same time a dispute arose between Beumer and Logan. Beumer referred both disputes to adjudication and the same adjudicator was appointed. Neither party knew that the same adjudicator was appointed in both adjudications.

Beumer pursued contradictory arguments in the two adjudications. For instance, it sought liquidated damages from Logan on the basis that works did not finish until 12 April 2016. Yet in the adjudication with Vinci, it claimed that works were finished on 19 December 2015.

The adjudicator found against Vinci. Vinci resisted payment and Beumer commenced enforcement proceedings.

Decision

Vinci argued against the adjudicator’s decision on the basis that there had been a breach of natural justice because:

the adjudicator had acquired background knowledge from the Logan adjudication

Vinci had been given no opportunity to consider or make submissions on that information

it was unfair that there had been no disclosure to Vinci of material provided in the Logan dispute which was relevant to the Vinci dispute. This was contrasted with the fact that had the adjudication taken place at a different time, it would have had the opportunity to consider that result. Beumer advanced factually inconsistent cases in both adjudications.

Beumer in response said:

there was no obligation to disclose that information and Vinci had no right to see it

that the adjudicator had restricted himself to looking at just the material relevant to each dispute and therefore there was no breach of natural justice

The Court found in favour of Vinci and determined there was a breach of the rules of natural justice.

Fraser J said there are two limbs to the rules of natural justice: a party should be able to present its case and meet the case against it; and the matter is to be decided by an impartial tribunal.

The threshold to find a breach of natural justice is high, it must be “obviously unfair” and in this case Fraser J thought that this threshold had been passed. As a standard, he pointed out that notwithstanding the time pressures of adjudication; it was still a formal dispute resolution process with basic requirements of fairness; “adjudication is not the wild west of dispute resolution”.

To that end, Fraser J took a dim view of the fact that Beumer had adopted completely contradictory positions in both adjudications on a subject matter that was relevant to both disputes.

He rejected Beumer’s argument that nothing flowed from the inconsistent cases, stating that he did not think it would be possible for “a director of a company could sign a statement of truth in two sets of legal proceedings in such circumstances … This alone should provide obvious direction to the industry to the type of behaviour that this constitutes”.

Turning to the adjudicator. Fraser J said he should have disclosed his appointment.

His failure to do so raised a whole host of issues that either could have been avoided or else dealt with at the time. He referred to the RICS form for requesting an adjudicator, which states:

“Adjudicators are required to disclose involvement or potential conflicts of interest to RICS prior to nomination”. In general terms, the judge placed an adjudicator akin to an arbitrator when considering rule 3 of the professional code of conduct for arbitrators:

“Both before and throughout the dispute resolution process, a member shall disclose all interest, relationships and matters likely to affect the member’s independence or impartiality or which might reasonably be perceived as likely to do so”.

Fraser J referred to a previous case, where Judge Coulson strongly discouraged unilateral phone calls due to potential bias, and said it would be difficult to argue there was not potential bias (at least) in this situation. His conclusion therefore was that “the breach of natural justice was sufficiently material that the decision will not be enforced”.

Comment

Where an adjudicator is acting in simultaneous adjudications with related parties his involvement should be disclosed from the outset.

Common Scenario

A developer enters into a finance agreement with a funder. As part of that finance agreement, and as a condition precedent to funding, the funder requires construction documents to be assigned by way of security. The developer then enters into a building contract with a contractor and assigns the benefit of that building contract to the funder to comply with his obligations under the funding agreement. The effect of this arrangement is, that whilst the developer still has to fulfil its own obligations to the contractor (e.g. it still has to pay for the works), it is no longer is able to enforce any of the contractor’s obligations: this right has been assigned to the funder instead. So what happens when something goes wrong and the developer needs to enforce a provision under the contract? This is what occurred in the following case…

Background

Mailbox entered into a funding arrangement under which it was required to assign to the funder “absolutely by way of security” its rights “from time to time” in assets including:

the Specific Contracts (as set out in the agreement) and

“all rights under any agreement to which it is a party and which is not mortgaged or charged under Clause 3.1 (Mortgages and Fixed Charges) together with all Related Rights in respect of such Charged property provided that [Mailbox] is entitled until the occurrence of an Event of Default which is continuing to exercise all rights assigned under this Clause 3.3 (Assignments)… and the [Funder] will reassign any such rights to the extent necessary to enable [Mailbox] to do so.” (emphasis added).

Mailbox was entitled to redeem the assignment upon the full payment or discharge of the secured liabilities. Mailbox entered into a building contract with Galliford Try (“GT”) whereby GT agreed to carry out refurbishment works to mixed-use retail and office space. The contract sum was circa £18m.

Most of the works were complete when on 1 March 2016 Mailbox purported to terminate the contract. A dispute between the parties followed, relating to delay, liquidated damages, the final account and whether or not termination was lawful.

The dispute was referred to adjudication and Mailbox was successful. The adjudicator decided that:

Mailbox was entitled to liquidated damages of a gross sum of £4.62m

GT was to pay Mailbox circa £2.477m

Mailbox was entitled to interest on the sums awarded.

GT refused to pay and Mailbox issued enforcement proceedings. GT argued that Mailbox had legally assigned the building contract to the funder therefore could not bring the adjudication in its own name; the adjudicator had no jurisdiction, his decision was a nullity and should be ignored.

Mailbox’s case was that there was no legal assignment. It argued that: The contract was not even in existence at the time of the assignment; you cannot assign future rights.

Whilst there may have been a charge in respect of the benefits under the building contract, there was no legal assignment and the parties had operated the building contract on the basis that Mailbox was entitled to the benefit (so raised the issue of conduct).

If there was an assignment, it had been reassigned before or on the day Mailbox commenced adjudication proceedings against GT.

The Court therefore had to consider the following points:

Was there a valid legal assignment?

If so, was it reassigned before the adjudication?

Decision

In relation to the Mailbox’s first point, the building contract was not included within the Specific Documents listed to be assigned. However, it did fall within the definition of “any agreement to which Mailbox is a party”.

The relevant clause in the funding agreement referred to Mailbox’s rights and interests “from time to time” which the judge said included future rights. He found that the parties must have intended this clause should operate as an effective assignment of existing rights and an agreement to assign future rights.

The second point raised by Mailbox was whether there was an absolute assignment or merely a charge in favour of the funder. The judge found that even though the language of the funding agreement was not the clearest, the express wording of the clause (“assigns absolutely its right, title and interest”) demonstrated the intention to operate as an absolute assignment.

The fact that Mailbox was required to give notice of assignment also supported this and indeed notice was validly given. Further, the fact that the document then referred to the rights being capable of reassignment supported the view that legal assignment was intended and indeed occurred.

On the final point of reassignment, the Court agreed with Mailbox. There was a valid reassignment of the building contract on or just before the Notice of Adjudication was served.

This meant that Mailbox was able to bring proceedings in its own name and the adjudicator’s decision was upheld.

Comment

What is not clear from the judgment is why the reassignment occurred. Did Mailbox discharge its debt in order to get the reassignment or did if the funder re-assign the documents given the situation which arose?

Mailbox got the result it needed but the process was unnecessarily complicated and the concern is that this is something that needs to be addressed more generally. This is not a new issue but this case raises the question: why does the funder need the benefit of the construction documents at the beginning of the project when it would already have the benefit of collateral warranties?

The response seems to be “because that’s what always happens”, or it’s the “market position”. That’s all well and good, but the fact remains that funders are unlikely to want to be involved in the day to day matters of the project or indeed want to have to enforce provisions against the contractor; typically funders simply want security.

Therefore it is important to strike a balance between providing sufficient security for a funder and enabling a developer to get on with the developer without constant recourse to the funder.

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